EC114 Introductory Macroeconomics Applications Lecture, Week 10

J James Reade

19/03/2015

Introduction

Today: The Budget!.
Tomorrow: Chapters 17–18: Banking, Debt and (Sovereign) Default.
Rest of term:
- Week 11:
  - Thursday: Claire Macallan from the Bank of England.
  - Friday: Chapters 19–21: Exchange Rates (guaranteed question).
Unable to cover chapters in full detail.
Reading all the chapters will be beneficial.

Due Friday March 27 4pm.
Word limit: 2000, strict (no 10%).
- Words after 2000th will not be counted (it’s electronic submission).
  - Ability to write succintly and clearly an acquired skill.
- Footnotes do not count (but no obligation to read footnotes).
- Tables and figures do not count (but do not abandon them).
- Harvard style referencing (copy style in academic papers).
Question Choose one of the guest lectures by Joe Grice, John Redwood and Sam Juthani and answer the following questions:
1. Summarise the lecture given by your chosen guest.
2. Identify which economic theories covered in lectures that the lecturers referred to. Was the lecturer in agreement with the theory?
3. Explain whether you agree with the lecturer.
All parts equally weighted.
Suggestion:
- Question splits up into three parts. Answer those three parts explicitly.

Thanks for participating!
Tutors gave me very positive feedback.
Attendance low again, but suspect those who fail to attend classes fail to attend lectures.
Next week:
- Why is the way you vote economically coherent.
- Visit: https://voteforpolicies.org.uk
  - Select policies on “Economy” and choose your preferred policies.
- Be prepared to defend your voting intention on economic grounds.

The budget was fiscal policy:
- Fiscal policy is government taxation and spending.
- Difference between taxation and spending is budget deficit.
  - Budget deficit: \(d = T-G\), hence \(d<0\) implies \(T<G\).
  - Deficit: Spending greater than taxation.
Distinction between planned and actual expenditures:
- Budget sets out planned expenditures.
Actual expenditures/tax receipts depend on the state of the economy:
- Employment levels.
- Profit levels.
- Spending levels.
- Productivity levels.
Actual fiscal outcomes depend critically on forecasts:
- Forecasts for all macro variables we’ve look at this term.
- Chancellors renowned for over-optimistic forecasts.

Does fiscal policy matter?
IS curve:
- All combinations of interest rates and output such that goods market in equilibrium.

LM curve:
- All combinations of interest rates and output such that money market in equilibrium.

IS-LM model:
- All combinations of interest rates and output such that economy in equilibrium.

Fiscal policy influences economic outcomes:
- Fiscal policy shifts the IS curve immediately since \(AD=C+I+G+NX\).
- Leads to increased output, but also increased interest rates:

Crowding out:
- Greater government spending leads to reduced investment.
- Increased interest rate leads to less investment: opportunity cost.
Will crowding out always occur?
- Horizontal LM curve implies no crowding out.
- Full monetary accommodation: Interest rate targetting.

Spare capacity implies monetary accommodation: No need for rate rises.
- Or use AS/AD diagram:

What is the single variable most macroeconomics boils down to?
- Productivity.
  - How much output is produced in time period by set of inputs.

Productivity is holed up in TFP:
- The portion of output not explained by the amount of inputs used in production.
- How efficiently factors of production used in production process.
- Human capital, human resources, institutions, technology.

Labour siezed upon the NHS, but productivity more important.
More productive country can earn more:
- Produce more for same effort level, export more goods.
Earnings are fundamentally how economies relates to individual agents:
- Net national disposable income from Joe Grice lecture.
- GDP is rising because more people are working, not because we are producing more per person.